Mitek Systems, Inc. — Form 10-Q Summary
Business context and period. The filing covers the quarter and nine months ended June 30, 2012. Mitek develops and sells mobile imaging and intelligent character-recognition software, including mobile check deposit and document-capture products. At quarter-end, 408 financial institutions had signed agreements to deploy Mobile Deposit; 137 had launched it.
Financial performance
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Nine months ended June 30, 2012 | Nine months ended June 30, 2011 |
|---|---|---|---|---|
| Revenue | $3.162m | $2.954m | $7.873m | $7.226m |
| Gross profit and margin | $2.803m; 88.6% | $2.516m; 85.2% | $6.902m; 87.7% | $6.324m; 87.5% |
| Operating income (loss) | $(2.019)m | $0.325m | $(4.856)m | $0.480m |
| Net income (loss) | $(2.009)m | $0.325m | $(4.830)m | $0.094m |
| Basic and diluted EPS | $(0.08) | $0.01 | $(0.19) | $0.00 |
| Operating cash flow | Not presented quarterly | $(1.026)m | $0.327m |
Quarter revenue rose 7%; nine-month revenue rose 9%. Software revenue increased 4% in both comparison periods, while maintenance and professional services grew 21% in the quarter and 28% year to date. Gross margin improved in the quarter and was broadly stable year to date. The company shifted from profits to losses as operating costs expanded sharply: quarterly selling and marketing, R&D, and G&A rose 62%, 187%, and 107%, respectively. Nine-month increases were 62%, 155%, and 82%. Management attributed the increases mainly to hiring and compensation, outside services, marketing, and higher legal costs. Stock-based compensation was $1.984m for the nine months, versus $0.891m a year earlier.
For the nine months, investing activities provided $0.948m net, including investment maturities and sales partly offset by purchases and $0.213m of property and equipment purchases. Financing provided $0.615m, primarily from option exercises. Cash and cash equivalents were $6.193m at June 30; cash plus short- and long-term investments totaled $15.446m, down $0.814m from September 30, 2011. Working capital was $15.057m, versus $17.344m. Current assets were $18.759m and current liabilities $3.701m. The company reported no borrowings under its $0.4m bank facility and said it complied with its minimum-liquidity covenant. It believed available cash, investments, and expected operating cash generation would meet working-capital needs for the next 12 months. Long-term debt is not reported; equipment was acquired under a capital lease, but the filing does not provide a clear remaining lease balance.
Changes, outlook, and risks
- Cost growth and losses: Revenue growth was modest relative to the increase in operating expenses, driving a $2.009m quarterly net loss and a $4.830m nine-month net loss. Nine-month operating cash use was $1.026m.
- Revenue variability and concentration: License revenue is often recognized upfront, and channel-partner purchases and renewals can make results uneven. In the quarter, three customers represented 40%, 13%, and 10% of revenue; the filing says sales through partners may reflect end users and renewal timing.
- Outlook: No numeric revenue or earnings guidance is provided. Management cited continued growth opportunities in mobile banking and imaging, while noting that lengthy implementation cycles, competition, product concentration, and the need to develop new applications could constrain performance.
- Legal contingency: USAA sued Mitek in March 2012 over patent and confidential-information matters; Mitek filed its own patent and contract claims in April and sought to amend them in July. Management said it did not expect the proceedings to have a material adverse effect, but patent litigation could entail significant costs or affect product sales.
- Subsequent lease change: On July 3, 2012, Mitek amended its office lease, reducing space and extending the term through June 30, 2019. Annual base rent beginning January 2013 is approximately $471,000, with annual increases of about 3%; a standby letter of credit allows landlord draws up to $210,000.
- Tax and equity matters: A full valuation allowance was maintained against deferred tax assets; use of net operating losses may be limited by ownership-change rules. Shares outstanding were 25,923,793 at July 31, 2012. Potentially dilutive securities were excluded from 2012 diluted loss per share as antidilutive.
Facts investors should verify
- Whether signed Mobile Deposit deployments convert into launches, transactions, recurring maintenance, and revenue at the expected pace.
- Whether expense growth moderates and operating cash flow improves as revenue scales.
- The timing and recurrence of channel-partner license renewals, customer concentration, and the effect of any lost partner relationship.
- Developments and potential costs or business effects of the USAA litigation, including any later rulings or settlements.
- Liquidity and covenant compliance, cash burn, and obligations under the extended office lease and capital lease.
- Potential dilution from stock options and restricted stock units; the filing reports $9.263m of unrecognized compensation expense expected over a weighted-average 3.5 years.